Transparency, Regulation and …

Rapoport's three-step plan for restoring confidence

Most readers don’t get to see newswire copy, which is available only to subscribers at a price we can’t afford. (Dow Jones: That’s a hint. And don’t forget we’re tax-deductible.)

Michael Rapoport, a columnist for Dow Jones Newswires, offers pretty simple advice for restoring investor to the financial system — so simple it may even strike some as radical, especially his last point, until you start to think about it.

Pull the curtain back, all the way, on what’s in those toxic mortgage

That’s right: complete transparency. Here’s why:

Even after months of write-downs, banks’ balance sheets are still clogged with illiquid, risky securities, many based on subprime mortgages or other garbage. The dozen or so largest banks and financial institutions alone have about $600 billion in “Level 3” securities — the especially risky securities for which there is no market, which are valued using their owners’ own models.

No one outside a particular bank can tell if those models are accurate or not, so no one can tell if the securities are properly valued or overvalued. Banks can’t be sure about who’s healthy and who’s not.

Solution:

So let’s help make them sure — by requiring public disclosure of every scrap of information about these securities, as some other commentators have suggested. Disclose what’s in them — the mortgage loans or other assets on which the securities are based. Disclose how they’re performing — how much money the underlying assets are taking in, and how many of them have gone bad. Complete transparency.

That would allow third parties to evaluate the assets on their own. Buyers would emerge for the better assets, and those who hold the worse assets would be exposed. Confidence about who banks can safely lend to and who investors can trust would be bolstered.

Some of these ideas have been bandied around, including by Bloomberg’s Jonathan Weil, and to some extent by Dennis Berman of The Wall Street Journal.

Next:

Take a big, concrete step toward tougher regulation.

He recommends starting with credit-default swaps—those insurance contracts on debt going bad that don’t require anyone to actually hold debt to take out insurance and gamble on it.

But:

More broadly, any major step toward better regulation of banking and markets would help reassure jittery banks that it’s safe to lend again. While there’s plenty of disagreement about who most needs regulating and how, there seems to be a widespread feeling that better regulation could have prevented or softened this crisis. A solid start in that direction might be just the thing to bolster confidence.

Of course.

And:

Indict somebody big. Quickly.

Finally. Dang.

One big reason Main Street is skeptical of the Wall Street bailout, and has pulled its money out of the market, is its sense that the bankers and executives who caused the crisis are getting away with it. The bankers and executives haven’t faced any sanctions. They’re still rich even though their companies’ stocks have tanked. They’re getting money from the government to prop up their companies. Meanwhile, ordinary people are losing their jobs, homes and retirement savings.

Investors want to see someone held accountable — and so authorities should move quickly to file charges against a chief executive or other bigwig who misled investors or otherwise broke the law in the course of the crisis. If that constitutes “making an example” of someone, so be it. No need to suggest names; anyone who’s followed this crisis for more than five minutes won’t have trouble compiling a list of possible candidates.

He emphasizes that this isn’t about scapegoating, but accountability. He adds helpfully:

The government may get there yet. Lehman Brothers Holdings Inc. (LEHMQ), American International Group Inc. (AIG), Fannie Mae (FNM), Freddie Mac (FRE) and Washington Mutual Inc. (WAMUQ)—all of which collapsed or required government bailout—are under investigation.

And I would add: How about indictments of some of the bigwigs who misled not only investors but borrowers, a circumstance that, the best evidence shows, happened on a mass scale during the bad old days of the bubble, especially in ‘05 and ‘06. The FBI’s lender-fraud probe is now up to 26 companies. Let’s get cracking.

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